A Big Idea for BigLaw? Just One Word: Strategy

Volume 39Number 4

By
Michael J. Ostermeyer

About the Author

Michael J. Ostermeyer is a partner with Quarles & Brady LLP, working out of the firm’s Milwaukee office. In addition to maintaining a full-time practice focused on public development and corporate real estate, he oversees his firm’s key client program and has led firm-wide initiatives ranging from business process mapping to fee structuring to accelerated business skill development for partners.

McGuire: I just want to say one word to you. Just one word.

Benjamin: Yes, sir.

McGuire: Are you listening?

Benjamin: Yes, I am.

McGuire: [Pause] Plastics.

Benjamin: [Pause] Exactly how do you mean?

McGuire: There’s a great future in plastics. Think about it.

Will you think about it?

Benjamin: Yes, I will.

McGuire: [Hushing Benjamin] Enough said. It’s a deal.

–The Graduate, 1967

LATE THIS SPRING, the placement firm of Major, Lindsey & Africa (MLA) published a concise state-of-the-industry article entitled “The Future of BigLaw: 2013 and Beyond.” Written by Jeffrey Lowe, MLA’s global practice leader and managing partner of the firm’s Washington, D.C., office, the piece offered yet another account of the many ways-in this case, the 13 ways-in which fundamental change has besieged our profession, and will continue to do so. In short, MLA’s piece underscored the widely quoted principal conclusion of the Citi/Hildebrandt “2013 Client Advisory,” published in January by Citi’s Private Bank Law Firm Group and by Hildebrandt Consulting: “[I]t is time to let go of any lingering notion that the [corporate law] industry will revert to the boom years before the Great Recession anytime soon.”

Like much of what issues from the consulterati, MLA’s analysis offered a confounding mash-up of lessons. On the one hand, the piece featured a half-dozen bold statements like this one: “The competition for lateral partners will … remain fierce, but will continue to be skewed toward those with significant portable practices.” Along the same lines: “The number of dissolutions and mergers will increase, and rainmakers at weaker firms will continue to move upstream, putting significant stress on those firms.” In other words, to quickly sum up: Profit is good, more profit is better, and next week will contain both one Tuesday and one Friday. Of course.

Larded among such statements of the obvious, however, lay an unusually thoughtful and distanced analysis of the first causes of BigLaw’s current uneasiness-including three factors that, in my view, lead the grim parade. Here they are:

From a revenue standpoint, most American markets represent no-growth or, at best, very low-growth prospects for traditional corporate firms.

An increasing number of corporate firm practices are viewed as undifferentiateable-giving rise to significant pricing constraints that, while in some instances an echo of recessionary pressure, generally reflect the fact thatthe affected practices themselves “are increasingly becoming commoditized.”

Many BigLaw firms (MLA’s experience), if not most (my observation), lack leadership versed in the kinds of business practices that might allow them to use data, analysis and vision to map a purposeful tactical course-let alone the professional management focus that’s needed to steer such a course with confidence.

Of these factors, Lowe underscored the third-and rightly so, since it’s the one most within the unmediated control of the firms affected. BigLaw, he declared, needs quickly to become much more familiar with the changing competitive environment, as well as much more adept at managing individual firm efforts within that environment. In short, said Lowe: “Now more than ever, firms that lack competent leaders, sound strategies or both will be extremely vulnerable.”

To which I say, as Mark Twain might, “That’s about the amount of it.”

BIGLAW’S COMPETITIVE CONTEXT: A PREDATOR’S PARADISE

For my money, the most thoughtful observer of the market dynamics that shape BigLaw is currently Michael Rynowecer, founder and president of the BTI Consulting Group in Wellesley, Mass. Rynowecer is not a bean counter; he is a marketer, and his firm maintains the only ongoing benchmarking survey of client satisfaction in the industry. As a consequence, he offers an unswervingly client-oriented view of corporate legal buying decisions.

Rynowecer’s research generates two key devices that help illuminate the unflattering portrait of BigLaw presented by MLA and Citi/Hildebrandt. The first of these devices is an assessment of average annual legal spending by large, publicly traded firms and their closely held counterparts, as shown in Figure A.

These data support several conclusions:

Average total spending (outside counsel costs plus internal legal spend) by companies in the pertinent market expanded more or less consistently right up into 2008, with outside counsel expenditures growing relentlessly over that period

2009 saw a dramatic retrenchment in average legal spend by companies in the market, evidenced by a decrease of more than 14 percent as compared to 2008 average spending

Average fees paid by this market to outside counsel have remained essentially unchanged-indeed, adjusted for inflation (roughly 9.2 percent from January 2009 through December 2012), these fees have actually decreased since January 2009.

In Rynowecer’s lexicon, these characteristics describe a “predator’s paradise.” In contrast to the dearly departed Golden Age of BigLaw, when generous annual increases in hourly rates supported healthy top-line increases for all market participants, revenue growth no longer occurs by fiat. Rather, as clients have, since 2008, spent less on outside counsel, BigLaw has found that growth requires taking work from the competitive set.

THE KEY TO SURVIVING? A DIFFERENTIATED OFFERING

So how does a firm face this new reality? Well, at least one thing seems clear: The times demand a sharper competitive instinct. And, in this respect, Rynowecer’s research provides a second valuable tool. Foundational to BTI’s approach is an array of 17 service attributes that, in the view of Rynowecer’s researchers, drive client decision-making (see Figure B).

The 17 service attributes emphasized by BTI cover quite a lot of ground, ranging from a firm’s ability to “meet budget and scope” to “understand[ing] the client’s business.” Rynowecer refines the list, however, by displaying all of the key qualities on a matrix that maps (1) the importance to clients on its horizontal access and (2) the scarcity of each quality in the marketplace on its vertical axis. So arrayed, Rynowecer’s assessment of the key service qualities can be understood by reviewing Table B.

Interpreting BTI’s matrix is simple: The farther to the right a quality lies, the more important it is to a client’s hiring decision; the farther to the top a quality lies, the more scarce clients perceive it to be among service providers in the marketplace. Similarly, the farther to the left a quality lies, the less important it is to a hiring decision, and the farther to the bottom a quality lies, the easier to find it is in a market. In an ideal world, then, a firm would be known by potential clients for providing service attributes that are both highly valued and difficult to find-or, otherwise stated, for its ability to identify, communicate and deliver on a differentiating promise that really matters to its clients.

These types of service attributes, it should be noted, cultivate precisely the kinds of conditions under which clients form long attachments to their professionals. In the terms of strategic marketers, these types of conditions create “positive affective reactions” that are highly valued for their emotive element. Indeed, an emotive tie to a product or service is the foundation upon which business organizations build not just competitive advantage but sustainable competitive advantage-advantage of a type that is particularly costly for a competitor to surmount.

So what lesson does BTI’s matrix hold for BigLaw firms seeking to develop the desired kinds of deep client attachments? What can it tell BigLaw, now living in a predator’s paradise, about how to compete better? Well, let’s pause for a minute and go back to Benjamin Braddock’s graduation party because, like Mr. McGuire, I have just one word of advice to offer.

WHAT IS STRATEGY? DEFINING DIFFERENTIATION

The link between the profit outcomes that BigLaw desires and the service inputs that it stands ready to deliver exists, now more than ever, in one place: with strategy.

What is strategy? For Michael Porter-the Harvard Business School professor who largely created the field, and who today remains its most prominent figure-strategy is the purposeful definition of differences. Indeed, for nearly 20 years since his seminal article “What Is Strategy?” appeared in a 1996 issue of the Harvard Business Review, Porter has consistently emphasized that strategy is about only one thing: fundamental difference-which is to say, either (1) about performing activities differently than one’s competitors or (2) about performing the same activities but in different ways. In Porter’s words: “Competitive strategy is about being different” and, thus, about “choosing a different set of activities to deliver a unique mix of value.” In short, says Porter, “A company can outperform rivals only if it can establish a difference that it can preserve.”

This is a message that, in my experience, BigLaw firms and their lawyers find hard to embrace. As a matter of constitution, we are generally not comfortable with difference. As a result, as Ashish Nanda, professor of law practice at the Harvard Law School, has noted, law firms rarely seek a first mover advantage. Indeed, in nearly 10 years of watching large firm management up close, I have found that new ideas and tactics are almost always greeted with one of two questions: either “So, who else is doing that?” or “Do we know whether [insert name of a competing firm here] is doing that?”

Given this discomfort, we tend instead to offer a variety of substitutes that, while poor, are vastly easier to manage. One of our favorites is efficiency. But efficiency, which is operational by necessity, is not strategy, as Porter observed: “[Efficiency] refers to any number of practices that allow a [firm] to better utilize its inputs by, for example, reducing defects in products or developing better products faster.” Another of our favorite substitutes for strategy is SWOT analysis, which seeks to set direction based on a tabulation of contextual factors arrayed behind the banner of “Strengths, Weaknesses, Opportunities and Threats.” Yet the ad hoc, languid nature of SWOT has long been dismissed by serious strategists-including Porter, who, as early as 2002, publicly expressed an aim to abandon SWOT in his search for a “more disciplined” and “systematic” approach.

Real strategy, on the other hand, focuses on the unique ways in which a firm’s resources can be deployed to meet the known and unknown needs of the firm’s clients. Says Charles Bamford, Dennis Thompson Chair of Entrepreneurial Leadership at McColl School of Business of Queens University in Charlotte, N.C., and principal of Bamford Associates LLC: “Business strategy lays out the logic of how value must be created” and “lays it out in a way that allows that logic to be communicated through all levels of the firm.”

CREATING STRATEGY: PROCESS, FOCUS, CANDOR

Orthodox versus unorthodox. Formulating strategy under the firm resources model is emphatically a process. The first step in the process focuses on an honest assessment of a firm’s business resources, with an eye toward identifying those resources that are truly unusual, or perhaps even unique, to the firm. In the parlance of strategists, these few resources are a firm’s “unorthodox” resources-in contrast to the many, many “orthodox” resources that, while necessary to a business enterprise, bear little potential for differentiating the firm from its peers as the firm addresses the expressed needs of its clients (e.g., capabilities such as shipping, conference support services, accounts receivable and so forth).

In the Wobegonian world of BigLaw, however, where all the partners are strong, good-looking and above average-not to mention absolutely the smartest people they know-the threshold task of identifying unorthodox resources often raises a surprisingly steep challenge. An exchange that I recently observed between Bamford and a consulting client of his illustrates how:

Bamford: So tell me then—what is the one resource you have at this firm that your competitors just cannot match?

Firm Chair: That’s easy, Chuck. It’s our people.

Bamford: Your people?

Firm Chair: Absolutely.

Bamford: Really?

Firm Chair: 100 percent.

Bamford: Okay. But let me ask you this, Do your main competitors—[firms X, Y and Z]—also have people?

Firm Chair: Well, of course they do.

Bamford: And where do you get your people?

Firm Chair: Some from law schools, of course. Others from competing firms.

Bamford: And where do your competitors get their people?

Firm Chair: Some from law schools, and others from competing firms.

Bamford: And do you recruit at the same law schools?

Firm Chair: Generally.

Bamford: And you take laterals from the same competing firms?

Firm Chair: I imagine so.

Bamford: And do your people and their people all take the same law school classes, bar exams, continuing education requirements and such?

Firm Chair: For the most part.

Bamford: And yet you think that your people are unorthodox?

Firm Chair: No doubt in my mind.

You see the challenge. Even to get past its opening phase, setting strategy demands seasoned perspective, a strong understanding of a firm’s client base and a great deal of courage.

But who wants any part of that? Even ignoring the general surfeit of courage, time and commitment are often in short supply as well. As Nanda observes, the result of wanting both the necessary scruple and the required time “is that [firm] leaders often find it difficult to either push through strategic action or to get professionals in their firm to focus on developing and executing strategy”-finding it far easier, obviously, to tell the firm’s partners that success lies in a new tagline, a “strategic” acquisition, a new South American office, a downward tweak in the staffing ratio and (does it even bear mentioning?) redoubled efforts at cross-selling.

Seek sustainable advantage. Once a firm has identified perhaps half a dozen genuine unorthodox resources (or, having been unable to identify a handful of the same, resolves to create such resources), it reviews each of those resources for the kinds of qualities that will allow the firm to create a competitive advantage that can be sustained. Resources that carry the seeds of such competitive advantage carry a special label: “resource-based advantages” (RBAs), as discussed so well by Bamford and G. Page West (of Wake Forest University) in Strategic Management: Value Creation, Sustainability and Performance. From this point forward, strategy is the quest to identify, amplify and array RBAs to the firm’s greatest advantage.

The RBA review contemplates a specific series of five questions:

Is the pertinent resource rare? As noted at the outset, the point of strategy is to discover and sustain what differentiates the firm from its competitors. It’s wishful in the extreme to suppose that a firm composed entirely of orthodox resources might convincingly be presented to clients as one that’s different. Hence the first step in assessing an unorthodox resource is to use research and objective data to determine how many of the firm’s competitors share any given resource. If it’s more than a handful who do-or more than a single direct competitor-the resource is not unorthodox.

Is the pertinent resource durable? Likewise, as noted at the outset, the point of strategy is to sustain the competitive advantage that can be provided by rare, desirable resources. If, however, a resource can readily be imitated by a competitor, or freely purchased in the marketplace, its propensity to sustain advantage is slight. In professional services practices, durable resources tend to focus less on substantive expertise, which relentlessly moves, with relative speed, downscale through the spectrum from “bet your business” to “expertise” to “bread and butter” to “commodity” in nature. Instead, as BTI’s matrix of service attributes (see Figure B again) rather forcefully suggests, durability tends to reside in the mode and manner of service delivery (witness the primacy of “commitment to help” and “client focus”), as well as in service extensions that amplify the counseling role (note “understands the client’s business”).

Can competitors readily trade for the pertinent resource? It is also necessary to consider the relative portability of a potential strategic asset. As Bamford observes, “a truly extraordinary resource has increased value to a firm if it is also hard to transfer.” If, however, the pertinent asset can be obtained with little friction in a fluid market, a firm cannot use it to create any sustainable advantage.

Can competitors readily substitute for the pertinent re-source? Can a firm’s competitors find substitute resources that would create equivalent value to the targeted resource? If so, the resource is “substitutable.” Note, for example, that lateral lawyers are both tradable and substitutable. In a profession where barriers to mobility are quickly vanishing, any resource obtained by lateral hiring can, and in most cases will, promptly be duplicated by a competing firm’s hiring either the same lateral lawyer (tradability) or a substantial equivalent (substitutability). As with tradable assets, substitutable resources-like lateral lawyers-cannot sustain competitive advantage.

Is the pertinent resource valuable? Finally, the firm needsto ask whether the pertinent resource has the ability to create extraordinary value for the firm, whether by (1) lowering its cost structure as compared to competitors, (2) enhancing its offering without increasing price, (3) permitting the firm to charge more for its offering or (4) enhancing the firm’s ability to reach or attract potential customers.

If, when all is said and done, all five of these questions may be answered “yes” as to any specific firm resource, that resource-an affirmed RBA-may be used by a firm as one of a short list (three? four?) of strategic first principles in building a plan for sustainable competitive advantage.

Listen to clients. Not to be forgotten in all of this poking and prodding: the clients. To begin with, BigLaw isn’t terribly adept at listening to them. As the Citi/Hildebrandt 2013 Client Survey observed, perhaps with undue deference to the profession: “It may seem obvious, but too often, we find that law firms do not take the time to listen to their clients in a systematic or sustained way.”

The clients, however, are the point. Once again, the aim of strategy is to differentiate the firm from its peers in the manner, and at the moment, that the firm addresses the expressed needs of its clients. Doing so, however, requires listening carefully to clients in an effort to determine what services they want and why-and, more importantly, how the firm in delivering those services can satisfy both the expressed needs themselves and the unexpressed needs at their root.

NO STRATEGY WITHOUT CONSISTENCY

So, then, why is strategy so hard for BigLaw?

Perhaps part of the answer lies in the nature of the discipline itself. “Strategy is the realized consequence of the professionals’ [collective] efforts,” observed Nanda. “For strategy to be effective, it is vital that everyone within the organization understands it and people act in concert.” Perhaps the focus on concerted action is just a bridge too far for lawyers.

Many years ago, on my very first day as law clerk to a federal judge, my judge told my highly impressionable 27-year-old self: “You’re a professional now, and the best thing about being a professional is”-and here he paused for effect-“that you’ll know what you have to do, but nobody will ever tell you how you have to do it.” Now, you may fairly disagree over whether that approach suits partners in a business organization-even if that organization is a professional services firm. What you cannot argue, though, is that strategy simply doesn’t work that way. Rather, it rises or falls on what strategists call “fit”-as Bamford and West define it, “tight coordination and internal consistency of action across the company.” Without fit, strategy fails.

Perhaps another part of the answer lies in lawyers’ unrelenting focus on results. We tend to measure our professional lives by past activity (billable hours) and by outcome (case decisions, deals closed and bonds sold). Strategy involves measurement, to be sure, but its focus is on future actions and not on past results. Results are what happen back there, once we have identified our key resources and arrayed all the members of our firm to keep those resources and their related benefits persistently in front of our clients.

And perhaps a third answer lies in our native suspicion of simplicity. Many of us make our living in ambiguity; all of us are trained to use it to our advantage. But an effective strategy needs to be stated as simply as possible so that it can be made tangible and can be understood, nested within and carried out at all levels of an organization.

And yet, as the thousands of business organizations that BigLaw represents can amply attest, there’s a great future in strategy.

Will you think about it? Enough said, then. It’s a deal.

SUGGESTED READINGS

“Emotional Responses to a Professional Service Encounter,” Journal of Services Marketing, Vol. 5, No. 2 (Spring 1991) by Madeline Johnson & George Zinkhan

Grow by Focusing on What Matters: Competitive Strategy in 3-Circles by Joel E. Urbany and James H. Davis. New York: Business Expert Press, 2010

On Reading Tomorrow’s Lawyers: An Introduction to Your Future

By Sheila M. Blackford

Being Law Practice’s editor-in-chief has its privileges. Among others, I got to read Professor Richard Susskind’s great lead article before you. But that just wasn’t enough; I wanted more. I wanted it now. A quick search and I had it delivered immediately to my Kindle. No heading off to Portland’s readers’ mecca, Powell’s City of Books, or waiting two days with Amazon’s one-click shopping. It’s great being one of tomorrow’s readers.

I confess to hanging out, captivated by Tomorrow’s Lawyers, rather than doing much else, as I find Susskind’s voice as engaging as his thoughts. In this book, he identifies where to go and what to look for as we attempt to find our places in the new landscape of the legal profession and justice system. A warning, though: This is not a book to begin the night before you have early appointments.

Here are some of Susskind’s points that piqued my interest:

“There is a profound message here for lawyers—when thinking about IT and the Internet, the challenge is not just to automate current working practices that are not efficient. The challenge is to innovate, to practise law in ways that we could not have done in the past.”

“There is something of a perfect storm here. Liberalization and information technology on their own would bring (and enable) reform but it is the more-for-less challenge, this imperative driven by grim economic conditions, that is and will continue to be the dominant force.”

“If my first major point in this book is that the legal market faces the more-for-less challenge, then my second is that legal work can be decomposed and sourced in new and different ways.”

“I claim that there are at least 13 disruptive technologies in law. Individually, these existing and emerging systems will challenge and change the way in which certain legal services are delivered. Collectively, they will transform the entire legal landscape.”

“To run a successful legal business in the future, therefore, it will not be sufficient for lawyers to be in possession of fine legal minds. Tomorrow’s lawyers will need to acquire various softer skills if they are to win new clients and keep them happy.”

Are you ready for the challenge? Can you embrace the unfolding future and build a law practice that is viable and sustainable? Will you take your place as one of tomorrow’s lawyers? What lies ahead may be found in Susskind’s latest book, Tomorrow’s Lawyers: An Introduction to Your Future, which is essential reading for moving forward in a changing legal landscape. So what are you waiting for? Get reading! Tomorrow’s Lawyers: An Introduction to Your Future, Published by the University of Oxford Press